1/16/2006

Contractions

Buried in this rather salacious article in Bloomberg (hat tip to Allah) is the news that in 2005, Japan's population decreased for the first time since they started keeping records. Birth rates being what they are, the trend shows every sign of accelerating in future years. On the one hand, this raises abstract concerns about what exactly the optimal population of the world should be anyway, and whether there is a moral or ethical good associated with a given population size. (I've wondered about this for a while, and I haven't a clue.) But more importantly, a declining population has some dramatic economic effects for the country, and every other country that has business with it:

While demographics rarely fit easily into investment decisions, comments last week by Jim Rogers should be a wake-up call for Japan. Rogers, who co-founded the Quantum Hedge Fund with George Soros in 1970, said he wouldn't increase his Japanese stock holdings because the falling birthrate will make it harder to pay the national debt.

"If the current birth rate, which is the lowest in the major developed countries, continues, there will be no Japanese,'' Rogers said. "Who will pay the enormous debt?''

It's a valid question, and one investors rushing back into Japan should be asking. A declining workforce will reduce tax revenue, making it harder to pay back the nation's 800 trillion yen ($7 trillion) debt. The government has said that the birth- to-death rate needs to rise to 2.1 to maintain Japan's current population of about 127 million. The birthrate now is 1.26 children per woman…. A declining labor force will exponentially reduce the gross domestic product of a huge economy on which many smaller ones rely. It will make Japan's massive unfounded pension liabilities harder to finance and the world's largest national debt harder to service. The result may be sharply higher Japanese debt yields.

An economy built on interest-bearing debts requires constant monetary growth, or else it breaks down; there has to be enough money out there to pay the compounding debts of the entire world. Without growth in the money supply you get deflation; money is constantly removed from the system until nobody can dare borrow money at all. Recall that in the Dark Ages, most commerce was done through barter; coins were used almost exclusively by the nobility and rich merchants, and trade was incredibly difficult.

If the money supply does grow, you run the risk of inflation. To avoid it, you need a corresponding growth in the supply of goods and services. In other words, either people need to multiply, or the same people need to develop endlessly-growing appetites for luxury. But what do you get for the shrinking country that has everything?

In economies with little debt, contracting populations are not quite as dire; deflation will set in as the relative supply of goods increases, but without the imperative to cover debt charges, the effects of this are mitigated. But for people—or countries—with high debt loads, deflation is fatal. Unless some new source of income is found, or debt is paid off while the costs are still manageable, bankruptcy is inevitable.

Population growth in the EU25 until 2025 will be mainly due to net migration, since total deaths in the EU25 will outnumber total births from 2010. The effect of net migration will no longer outweigh the natural decrease after 2025, when the population will start to decline gradually.

We in the United States may be tempted to breathe sighs of relief, considering our marginally better demographic picture, but even we will not escape the global slowdown ahead of us. When our overseas customers begin disappearing, how will we avoid recession and deflation ourselves?

We can see the troubles ahead. It would be criminal not to prepare for them while we can. The national debt, and all of our personal debts, can no longer be deferred to another day. This is that day, and now we must act.